You have submitted a report on reviving the MSME sector. What are the key challenges?
There are 60 million MSMEs employing 110 million people. They account for 25% of services gross domestic product (GDP) and one-third of manufacturing GDP. No large company can operate without MSMEs, as they are part of the supply chain and distribution, both upstream and downstream. In a nutshell, the sector is the backbone of the economy. Even before covid-19, this sector had issues—most of these enterprises are informal, dwarfs and not growing strong. So, here’s the data, 95% of all companies in India employ less than five people. 98% employ less than 10. Only 20,000 firms have a paid up capital of ₹10 crore, or more each. We have an extremely low industrial base. If we do not fix this issue there is no chance of becoming atma nirbhar, thereby competing with China, or growing to $5 trillion.
You said, without fixing MSMEs we cannot become atma nirbhar, or compete with China. Please elaborate...
If we are looking to become a $5-trillion economy, it will not happen without a healthy, vibrant MSME sector, and a lot of entrepreneurship. Okay, now let me elaborate. In India, everything, even the most mundane things—not just servers, 5G equipment, and phones—are coming from China…why are salwar kameez, Ganesh statues, Diwali bulbs, etc., coming from China? That is because they have fantastic entrepreneurs who are hungry to grow their businesses, come to India, go to Africa, go to South-East Asia…and find out what people need, and find a way to fulfil it. This is not because the Chinese government told them to go for it.
Therefore, this has to happen through the entrepreneurial drive of tens of millions of people. Now, we have to replicate the same thing. Today, we may not be able to make a flat screen television on our own, because the components and supply chains are in China. But there are many items that we can make on our own. Who is going to make them? For that, we need entrepreneurs who essentially will be MSMEs. Some of them will grow and become large companies, and very large companies. This progression is broken in India. And, that’s largely because we don’t have enough entrepreneurial drive. It is so hard to start and run a business in most of our states. So, to achieve the prime minister’s economic objectives, dynamism is critical and MSMEs are crucial.
You think enough attention is being paid to MSMEs?
I don’t think enough attention has been paid. This (covid-19) is the third shock for MSMEs after demonetization and goods and services tax (GST). Some 30-40% are facing the possibility of extinction…that is the extent of the problem right now. When we looked at the most recent surveys, 57% have already run out of cash. Covid is not going to go away anytime soon. So, the economy will open, reopen, close many times. I think, these companies were fragile to start with, and extremely badly impacted by covid-19. The issue for us is how do we create a new breed of companies that are able to be productive, compete and grow?
Companies that start out as formal enterprises…end up being two to three times more productive than a similar informal business. So, why do firms prefer to be informal? Because, in almost all our states, the cost of formalizing, of complying with the 58,000 different regulations and compliances, is so onerous that many firms say it’s better to remain informal.
What has the industry-expert alliance recommended in the report?
There are recommendations on how to solve the liquidity challenge, the banking-partnerships, timely disbursement of loans, etc. That is the survival recommendation on the trade side. A lot of it has to do with taking these 58,000 compliances, and drastically simplifying them, digitizing core processes and decriminalizing rules for companies. I think, there are about 9,000 compliances which have prison sentence provisions. So, you are constantly afraid. Let’s use the crisis to make it dramatically easy for any business to start and operate. Another set of recommendations is on how to create a much more dynamic or entrepreneurial environment, like we have in Gurgaon or Bengaluru, and replicate it in dozens of other cities.
There are many recommendations about how states and the Centre can do it…a lot is also aimed at the private sector large companies, because they have a big role to play in the success of their MSMEs. How do you encourage entrepreneurship, how do we create hubs, special economic zones where a company can come in and set up business very easily and get incentives? Sometimes you start with an existing cluster and strengthen it and, second, you can set up a land bank of, say, 5,000 acres for a cluster to come alive. You need a large successful company as the first anchor tenant. Once you get the anchor companies the others start coming. So, in automotive, if you’re able to get Tesla to come to Punjab and set up then you can pretty much guarantee that it will develop into an EV (electric vehicles) cluster. Sometimes to do that you will have to offer incentives.
But land acquisition is tough?
There are challenges, but where the state has a will, it will find a way. So, a lot of these issues are a question of political will. I don’t think it is always about finding new land, but is about repurposing land banks, whether it is from non-performing, or closed PSU units, etc. We are working now with three state governments—Punjab, Karntaka and Meghalaya. Uttarakhand is showing a lot of interest. In Punjab, we are also working on a model to fix the financial problem of MSMEs in partnership with financial institutions.
You said, it will lead to formalization and job creation? What is the target?
On hundred million in 10 years. In the last one decade, the rate of employment growth in India has been half of the population growth. That is the reason why we have the highest unemployment rate pre-covid. You look at what China has done over the last decade. On an average, they were able to create about 10 million new jobs a year. So, if we get to the point where we are able to create 10 million decent jobs a year, it will be a fantastic achievement.
What about wage safety, and labour productivity?
While employers need flexibility, the employees need a lot of protection and safety nets—health and safe environments, job security, retirement benefits, etc. If you don’t give these things to an employee, you cannot have a productive workforce. We are now caught in a low-wage and low-productivity trap. This needs to change.